"New Fed Whisperer" Final Preview of September Meeting: Situation Complex, First Rate Cut Size Still Uncertain
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"New Fed Whisperer" Final Preview of September Meeting: Situation Complex, First Rate Cut Size Still Uncertain
The forecasts related to the September meeting are particularly valuable, as there are only two meetings left this year—the November and December meetings.
Navigating Web3 tides with focused insightsBy Hao He, Wall Street Horizon
On Tuesday, Nick Timiraos, the influential financial journalist known as the "New Fed Whisperer," wrote that while the Federal Reserve is poised to begin cutting interest rates, uncertainty remains over the size of the initial rate cut. The Fed typically favors moves of 25 basis points, but this time, the situation has grown more complex.
Timiraos stated upfront that the Fed's benchmark interest rate currently stands at 5.25%-5.5%, the highest level in two decades. The central bank is expected to start easing on Wednesday, aiming to sustain a stable labor market as inflationary pressures cool.
According to Timiraos, whether the Fed opts for a larger 50-basis-point cut or sticks with the traditional 25-basis-point reduction will depend on how Chair Jerome Powell guides his colleagues through a series of delicate considerations.
Fed officials usually prefer 25-basis-point adjustments—whether hikes or cuts—to assess the impact of their actions. But when they perceive a misalignment between current policy and evolving risks, they act more swiftly. For example, in 2022, the Fed raised rates by 50 and 75 basis points to combat high inflation.
Economic data over recent months show inflation has resumed a steady decline toward the Fed’s 2% target. However, the labor market has cooled: the unemployment rate rose from 3.7% at the end of last year to 4.2% in August. Monthly nonfarm payroll growth slowed to an average of 116,000 over the three months through August, down from 212,000 in December 2023.
Until late last week, investors expected only a 25-basis-point cut at the Fed’s September meeting, as few officials had publicly advocated for deeper cuts.
The Federal Open Market Committee (FOMC) entered its pre-meeting quiet period starting September 7. Timiraos cited several senior Fed officials’ remarks made just before the blackout period, highlighting their hesitation over the magnitude of the cut:
On September 6, Federal Reserve Governor Christopher Waller, reacting to the latest nonfarm payrolls report, said, “When inflation accelerated in 2022, I was a strong advocate for front-loading rate hikes. And if appropriate, I would also advocate for front-loading rate cuts.” At the time, Waller did not appear concerned about the recent slowdown in job growth. He noted that even if monthly job gains fell to 100,000, it wouldn’t be alarming.
Also on September 6, New York Fed President John Williams, the Fed’s third-ranking official, said recent data indicate a broad trend of cooling, with persistent signs suggesting the economy needs to achieve and maintain balance.
Timiraos noted that Fed officials often describe their work as risk management—weighing the risk of inflation resurgence against the risk of a sharp rise in unemployment. They typically set rates in response to whichever risk appears costlier. Over most of the past two and a half years, as inflation surged above 7%, risk management favored aggressive tightening to prevent entrenched price pressures.
Thinking through the lens of risk management, Timiraos cited former Dallas Fed President Robert Kaplan:
"If officials consider which mistake they’d regret less after this week’s meeting, starting the easing cycle with a 50-basis-point cut makes sense."
"If I were back in my old seat, I’d say I can accept 25 basis points, but I’d prefer 50. Given where inflation and unemployment stand, the Fed’s benchmark rate should be about one percentage point lower than today. Starting from scratch, I’d say rates should be around 4.5%."
Since inflation isn't fully defeated, the Fed should avoid letting the economy weaken further, which could force faster or deeper cuts later—and potentially reignite inflation.
A large cut this week followed by solid economic performance before the next meeting in early November would likely not leave officials regretting their action, especially since rates would still remain relatively high. But if the Fed opts for a smaller cut now and the labor market deteriorates faster, officials would likely feel greater regret.
Fed minutes from July showed some officials were ready to cut then, but most preferred to wait. The July nonfarm payrolls report released after the July meeting was much weaker than expected. "The Fed missed one meeting—that’s manageable. But if they could do it again, I wish they had cut in July. I’d rather correct this now, get ahead of the curve, than spend the entire fall chasing a weakening economy."
Timiraos also extensively quoted William English, a former senior advisor to the Fed:
"For the Fed, the key question at this meeting is their assessment of the risk balance. If they are more concerned about growth and employment than inflation, they’ll likely want to add a bit more insurance via a larger cut—i.e., 50 basis points."
The case for a smaller 25-basis-point cut includes arguments such as solid underlying economic fundamentals, or concerns that cutting too fast could encourage excessive risk-taking in financial markets, keeping inflation elevated. If the Fed doubts inflation is truly as tamed as recent data suggest, they may still fear a longer, bumpier fight against inflation.
Several weeks ago, English believed a smaller cut was appropriate. But the recent downward trend in labor market data has made him more uneasy, particularly because even after two or three cuts, interest rates would still be relatively high.
The outcome of this week’s decision is essentially a toss-up, reflecting genuine uncertainty among Fed officials about the right path forward. It's not that half the committee supports a 50-basis-point cut and the other half a 25-basis-point cut, leading to internal clashes. Rather, there is a group of policymakers who are genuinely unsure what the correct move is. In the end, Powell may be able to build a reasonable consensus around either option.
What Comes Next
Timiraos pointed out that the Fed’s choice will be complemented by its quarterly economic projections, which reveal where officials expect interest rates to stand by year-end. While these projections are not the result of formal committee deliberations, they carry significant weight in financial markets, as policymakers’ rate outlooks influence borrowing costs across mortgages, auto loans, and business debt.
September’s projections are especially meaningful because only two meetings remain this year—November and December. The September forecasts thus offer an unusually specific view into those final two decisions.
If more officials project a total of 100 basis points in rate cuts this year, that implies at least one 50-basis-point cut. Delaying a larger cut until later in the year could raise awkward questions: Why would that have been the better approach? The alternative is a 25-basis-point cut in September, with expectations of similar-sized cuts at the final two meetings, while retaining the option to accelerate easing if the economy worsens.
Given the near-even split in views, Powell may face at least one policymaker dissenting this week. The 12 voting members include five regional Fed presidents and seven Fed governors based in Washington. Over the past two years, no Fed official has dissented from a policy decision—a streak matching the longest such record in over half a century. Moreover, since 2005, Fed governors have never voiced disagreement with an interest rate decision.
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